Australia sees no need to ring-fence banks

CarolineHenshaw

SYDNEY--Australian regulators see no need to follow their U.S. and European counterparts in debating whether to ring-fence the retail and investment banking operations of the country's major lenders.

Former Citigroup Chief Executive Sandy Weill, seen by many as the architect of the megabank, last month reignited the debate that has gripped Wall Street since the financial crisis when he said that no bank should be "too big to fail." In the U.K., lawmakers are debating proposals to force banks to ring-fence their retail banking operations from the riskier investment banking activities by 2019.

Adrian Blundell-Wignall, a senior executive at the Organisation for Economic Co-operation & Development and Former Reserve Bank of Australia economist, argues that separating traditional banking from securities is vital to restore the global financial system to health in the wake of the financial crisis.

"The financial system is just a system of promises," he said. "The minimum requirement of any financial regulator system should be that the same promise should be treated the same way wherever it is."

But officials say that Australia's big banks--Australia & New Zealand Banking Group Ltd. (ANZ.AU), Commonwealth Bank of Australia (CBA.AU), National Australia Bank Ltd. (NAB.AU) and Westpac Banking Corp. (WBC.AU) -- don't need more regulation because investment banking is only a small part of their businesses.

Steven Munchenbuerg, head of lobby group the Australian Banking Association, said that Australia's banks don't face "the same risks that have been identified in other jurisdictions" and therefore he didn't believe, "and our understanding is that nor does the government," that more regulation is necessary.

A spokesman for Treasurer Wayne Swan said Australia's banks are already well-regulated and do "not have substantial investment banking operations."

"Australian lenders didn't engage in the risky lending practices seen elsewhere in the world," he said. "They are highly-capitalized, and retail depositors in Australia are protected by our Financial Claims Scheme," he added.

Spokespeople for the banks and the Australian Prudential Regulation Authority declined to comment.

Local advisory services and capital markets activities have traditionally been filled by the local operations of international investment banks such as Goldman Sachs Inc.
GS, -1.03%
and Australia's only listed investment bank, Macquarie Group Ltd. (MQG.AU), rather than the big four.

That's not to say Australia's banks have been immune to the problems that have crippled the world's banking sector. In 2008, as the crisis deepened, the government was forced to step in to guarantee the banks so they could access funding from turbulent wholesale markets.

When Moody's Investors Service downgraded Macquarie in March it said two notches of its A2 rating for Macquarie Bank division were because of the "systemic support the bank is likely to receive, in case of need, as a consequence of its significant presence in Australia's financial markets and its deposit base." It rates the overall Macquarie Group at A3--this includes riskier operations such as cash, equities and capital markets.

Mr. Blundell-Wignall argues that Australia needs to follow the suit of other international regulators if it is to avoid becoming the lowest denominator in terms of financial regulation, which could breed more problems for the local financial system.

"We should still have that kind of regulation here because what is true today isn't necessarily true tomorrow," he said.

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